Strategic management accounting is a theory and practice of accounting that looks at an organization's cost position, cost advantages and product differentiation in order to make market decisions. Traditional management accounting does not take these factors into consideration and relies much more heavily on accounting systems that are already in place in an organization. The strategic management accounting method analyzes information to create higher profit margins and distinguish an organization from its competitors in a global marketplace.
A key component of strategic management accounting is examining factors that take place externally from the organization. These factors include new competition in the marketplace, which includes the cost of entering the market and the number of overall competitors in a particular industry. Another concern is whether there are substitute products or services available, such as new technology or products that can eliminate the need for an existing product. Industry competition is examined to determine an organization's biggest competitors as well as those competitors' pricing and status in the market.
Cost is a key point in the analysis, from the supply chain to the amount of money that an organization can charge for its products and services. Strategic management accounting looks at ways to lower costs as much as possible in order to raise profits. This includes basic business practices such as lowering costs on human resources, company operations, developing technology, marketing products and services and improving productivity. An organization will analyze its costs before performing the same process on its competitors. The goal of an organization is to have a higher profit position than the competition.
After an organization and its competitors have been analyzed, a strategy is put into place depending on the needs of the organization. In areas where costs could be lowered, the long-term ramifications are addressed, such as the possibility of losing productivity. Areas of investment are also examined relating to their long-term advantages or disadvantages, including whether they will raise the profit margin in the future. Long-term plans are developed but have to remain flexible because of the constantly changing nature of the market. Progress is measured with traditional financial methods, such as profit and loss, and with more contemporary methods such as customer satisfaction ratings and market share.